The possibility that the current economic upcycle might be getting long in the tooth seemed to be on the minds of financial pros interviewed by Plastics News. Several mentioned the possibility of a downturn in 2016.
“We're in a cyclical peak in M&A,” said Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago. “People are looking for something to scare us into a downturn. As we get closer to the election, there could be signs of problems in the economy and that could trigger a downturn in M&A. We could see lower valuations and multiples in the second half.”
“We could see a crack in the economy in 2016,” added Ridenour. “We could be coming to an end in the boom curve.” Minnick said that the economy “might see a bump or a hurdle, but not enough to hurt fundamentals.”
No interest in rate hike
Across the board, financial pros who talked with Plastics News don't expect much of an impact in 2016 from the U.S. Federal Reserve's recent decision to increase interest rates by 0.25 percent. It was the first increase in several years, as the Fed kept rates low to stimulate the economy after the recession.
“There might be some nervous borrowing and banks might be a little more cautious, but there shouldn't be much of an impact,” said Blaige. “The effect on psychology might be a little more.”
The rate increase “isn't likely to have a significant impact,” added Evatz. “There are still a lot of aggressive lenders.”
Petryk pointed out that interest rates “are still very low — it's still an attractive market to borrow money in and still a very inexpensive form of capital.
Plastics News reported on almost 70 plastics M&A deals in the second half of 2015. Noteworthy deals included:
• Jarden Corp.'s $1.35 billion acquisition of plastic food service product maker Waddington Group Inc. That deal came a few months before Jarden merged with Newell Rubbermaid — another major plastics processor —to create a consumer products giant with annual sales of $16 billion.
• Plastics packaging giant Berry Plastics paying $2.45 billion for medical products manufacturer Avintiv.
• Faurecia selling its automotive exteriors business to CIE Plastic Ominum for $732 million.
• RPC buying fellow European injection molding giant Global Closure for $714 million.
Many of these megadeals — at least eight plastics-related businesses sold for more than $250 million in the second half — took place in the familiar markets of automotive, packaging and medical —– recent favorites of plastics investors.
Interest remains in each of those three sectors, although some financial pros feel automotive may have peaked, in light of record U.S. production and sales in 2015. “Auto is stable, but it's not a growth market, except maybe in Mexico,” Ridenour said.
“I don't think automotive can grow long-term at its current rate,” added Petryk. “Some of this growth is from consumer confidence coming back and people buying who had delayed purchases.”
Whiting added that packaging “is strong — it handled the recession better than some did — and medical is less cyclical.” Evatz agreed that packaging “is up,” which he said has led to an increase in packaging-related injection molding and thermoforming deals.
“Cyclicals like automotive and building and construction are coming back,” said Blaige. “Non-cyclicals like packaging and medical started to come back sooner.”
And although the construction market has rebounded slowly, Mayer listed it as a growth market for 2016. “Investors are looking at the long term horizon for housing, which could get back to 1.4 million or 1.6 million housing starts in the U.S. in the next few years,” he said.
From a geographic perspective, Mexico and other parts of Latin America continue to draw investors. Minnick's firm last year sold a plastics firm in Mexico to a Japanese buyer. Buying an existing plant, he said, “is less expensive than a greenfield project, which easily could cost $20 million to build and that could lose money for a few years.”
Blaige agreed that Latin American locations such as Mexico, Colombia and Peru remain attractive, but Brazil and Argentina are less desirable because of recent economic struggles.
Time to go?
So if multiples paid for plastics firms are high — but might not get higher in 2016 — does that mean that owners of those companies should be heading for the exits?
“A lot of owners are in their mid-60s and started thinking of selling five or six years ago,” Minnick said. “They buckled down after the recession and made investments, and now those investments are paying off. So you might see small and midsize guys decide to sell.”
Lower stock market returns, however, might lead plastics owners to hold on longer, Petryk said, since the market can't provide superior returns. In spite of that, he added that 2016 is “not only a great time for sellers with valuations, but with purchase agreements with more seller friendly terms.”
Hart advised owners considering a sale to engage in the process early in order to assess the value of their company and their shareholders' needs. “Timing a deal is always the challenging part,” he said. “But it's better to wait months — not years.”